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As defined by the STB, interchange commitments are contractual provisions, included within a rail line lease or sale, limiting the incentive or ability of a tenant or purchaser railroad to interchange traffic with a railroad other than the leasing or selling railroad. And under its previous rules, if a proposed rail line acquisition involves an interchange commitment, the proponent must inform the Board of the commitment, and must file with the agency a complete and confidential version of the agreement containing that commitment.

It added that in November 2012, the STB proposed additional reporting for interchange commitments in both leases and sales and it adopted its proposal, albeit with some modifications.

Under the new changes, the STB said it will now require parties to file:
-information concerning shippers, carloads and potential interchanging railroads on the affected line;
-a verification that shippers on the line have been notified;
-an estimate of the lease- or sale-price differential with and without an interchange commitment; and
-a case caption that indicates an interchange commitment. The Board will treat the shipper, carload, and lease- or sale-price information as confidential

Bill Rennicke, managing director of Boston-based consultancy Oliver Wyman, told LM that these changes identify provisions in the purchase and sale agreement covering the transfer of the rail line from the current owner to the shortline that creates a barrier to pricing flexibility.

“It arises when the seller discount’s the cost of the line or the buyer requests a preferential price in return for some type of subsequent concessions,” he said. “The concessions that offset the sale price discount could be a differential in revenue splits, special preferential commercial terms to the seller or in some cases historically a barrier to using a competing carriers interchange. The STB is requiring those transactional provisions that balance purchase price against subsequent commercial terms to be disclosed.”

Rennicke said the objective with this reporting requirements is to make things more transparent and provide more calculations and documentation at the times of sale. But he cautioned that there have long been issues with paper barriers, which are based on the ability of the buyer to pay their full costs on day one of the contract or provider Class I rail carriers with preferential treatment on traffic over a long period of time like 25 or 30 years in exchange for lower rates.
When asked what is at stake for railroad shippers with this ruling, Rennicke said they don’t really stand to have anything to lose.

“The only possibility for that would be when a Class I decides to spin off a short line,” he said. “Given that most of the regionals and short lines have been spun off to Class Is, there are not a lot of those types of transactions. Or if you had a marginal line and a buyer could only finance you at 50 percent of its asset value and they find this process that precludes setting up some type of preferential treatment, it might turn out that a transaction is not consummated and the [rail] line is shut down. If the disclosure process discourages the use of these procedures that have been employed in the past, and the shippers play railroads off of one another, depending on the number of interchanges, the shipper then gains a competitive advantage.”

The American Chemistry Council (ACC) in response to the STB’s ruling said that interchange commitments clearly inhibit potential competition between Class I railroads and interfere with market-based rates, adding that a significant purchase of such an agreement is to ensure that in spinning off a short-line railroad a Class I railroad will not have to compete with another carrier for the covered traffic.

“While the decision does not address existing agreements, this action will allow for increased transparency and more open consideration of future transactions,” ACC said in a statement. “The new requirements will help to determine if there are competition issues for STB to address. In order to do so, the involved parties will have to submit detailed data to STB regarding the logistics of the rail transport, including shipping, cost and interchange agreement information.
To ensure the new requirements provide meaningful improvements, we urge the STB to inform the public specifically how the information it collects will be used to evaluate the potential anti-competitive impacts of interchange commitments in future rail transactions.”

While interchange commitments interfere with market-based rates that come from a level playing field, Rennicke said the ACC does not recognize is that there is a layer of value in that initial transaction where the seller of the short line is not going to charge as much as it would have had there been a level playing field the ACC is looking for.

If it wanted a level playing field, he explained it is likely more money would have been spent in buying the line, because a Class I may then be less likely to offer any type of preferential treatment for the traffic that was on it.

“The reason there is not a level playing field is that the seller discounted the price of the line that sold in prior years,” said Rennicke. “Had the short-line had enough money to buy it at the true market value at that time there would be an issue. There are many lines where there is no barrier like this because a short line has so much value there that they will pay the full commercial value of a line with no restrictions on what they deliver for traffic afterwards. “

About the Author

Jeff BermanGroup News Editor

Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. .(JavaScript must be enabled to view this email address).

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